Floorless Preferred Stock/Debenture Message Board

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Strategies & Market Trends : Floorless Preferred Stock/Debenture

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To: SpecialK who wrote (1422)	11/6/2002 10:25:21 AM
From: RockyBalboa	Read Replies (1) of 1438

It is not a big problem if the conversion price is fixed. The element constituing the downward pressure on the stock price is missing here. There is nothing to gain from depressing a stock price further. Only changes are, if the convertible is broken because the stock price is too low, making make any conversion senseless, some companies give in and reduce the conversion prices (and dilute the common stock by doing so, issuing a lot more shares). And if the stock goes up the convert holders may reduce equity risk by hedging it (shorting common stock against the bond). If the debt is downgraded by a rating agency, though (or a downgrade in rumoured to happen), the common stock must be shorted if it offers better prices than the market value of the bond would be, adjusted by the (increased) credit spread. This could be done at prices below the conversion price... The "real" premium though, could be better approximated by discounting the conversion price by the excess yield over comparable maturities (5yr swap), especially if the company does not pay any dividend.

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